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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4066
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Stephen G, we chatted yesterday about the bar and grill business

Resolved Question:

Stephen G, we chatted yesterday about the bar and grill business that I own with my Brother. Your answer was helpful and I get it in concept ("I think"). So what I need help with right now is a specific step by step action plan to get this thing going. I will begin by re-clarifying the facts of the case and the situation AND my interpretation of your answer:

1. We have one business (a Bar & Grill) that does roughly $600k per year in revenue. We purchased the business in June of 2012. We purchased the business, the land and the building all in the same transaction. Purchase was financed with 85% debt...with half the debt coming from the SBA and there other from a local commercial bank.
2. The operation is accounted for through two legal entities, both of them are Washington State LLCs and both of the them have the same 3 members...Me (45%), my brother (45%) and our dad (10%).
3. The first LLC ("Business LLC") is the whole operation essentially, it includes all the operating assets (Inventory, Furniture & Equipment, etc), and has all of the employees.
4. The second LLC ("Real Estate LLC") has no employees, it carries only the land and the building on its balance sheet along with ALL of the Debt used to finance the purchase of the business. Its only operating activity is to record rent income from the Business LLC and to service the Debt. The rent income and the debt service are equal so it has essential zero cash flow but will show a loss due to depreciation.
5. The Lenders (the bank and the SBA) view both LLC's together as "the borrower". In fact, one of them addressed their year end tax info interest/principal recap to the first LLC and the other bank addressed its info to the second LLC. This seems strange that they can do this but probably irrelavant to the tax return so who cares.
6. As you know, I am an accountant (but not really a tax guy obviously), the only way I knew how to start my book keeping debits and credits for these two entities was to first move all of the inventory and operating assets into the "Business LLC" by simply taking the assets away from one LLC and adding them to the other LLC, with the offsetting entry in both cases being the "Members Equity" accounts...so it was essentially a contribution of assets from one LLC to the other to get things started.
7. I use Quickbooks for accounting in both LLCs, the books are clean and up to date and ready to transfer info to tax returns.
8. I have Turbo Tax business Edition, lots of experience with Intuit products including Turbo Tax for individuals.
9. I need to get this done...my dad and brother are expecting big refunds and really need the money right now so filing an extension is not a favorable option at the moment. I can really "jam" on the return once I know which return (or returns) to file and which entities to include where.
My interpretation of your answer from yesterday is that I can create (right now) a brand new Tax Payer ID that I will put on a single 1065 return...and this 1065 return will include the combined results of both of our LLCs...AND I will add some kind of Tax Payer statement to the return that explains that it contains the results of both of our LLCs. Is this correct?
If it is correct, I love this idea because it will be so much easier to do one return with both LLCs included and it eliminates the issue of having to report the "transaction" involving the contribution of assets by one LLC to the other.
What I really need to know is (sorry I don't have a copy of the transcript from yesterdays chat):
1. How again do I actually create a new Tax Payer ID# XXXXX use for purposes of filing this return that combines the results of both LLCs?
2. Do I have to have a "Name" that goes along with the Tax Payer ID# XXXXX I set up and can it be just any name I decide to make up.
3. Once I have done all of this, how specifically, do a inform the IRS that this particular tax return includes the results of both or our LLCs combined.
Once I know my tax payer ID and Business name to use on the return I'm confident that I will be able to complete the return using all of the accounting info that I have in completed and summarized in Quickbooks. Very much appreciatie anything you can do to help me figure this out and will be happy to throw in a bonus and another excellent rating if you can get me through this.
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G :

Well, first of all, I'll be glad to help you any way I can & appreciate whatever compensation & rating you think I earn.

Stephen G :

Second of all, you can easily access yesterdays chat/question & answer, it doesn't get erased. You can copy & print it any way you want & I'm sure you can do that with your background.

Stephen G :

As far as your summary today, you clearly have a good grasp of what we discussed & I don't find anything not in concert with my idea.

Stephen G :

Remember that the LLCs are disregarded entities for income tax purposes;

Stephen G :

I'm not sure that the way you "divided" the assets has any real legal effect; for example, where is the actual title to the personal property? Was there a bill of sale or some other document? As I recall only one of the LLCs had everything and you did the "splitting". But the debt carries both names.

Customer:

Yep, you got it, they are just accounting entries that I made to move certain assets from one accounting entity to the other.Great, so my first step is to go to that IRS website and create a Tax Payer ID# XXXXX use on my

Stephen G :

So, all that aside, if the IRS were to come looking for the LLCs activity, you would just give them the partnership name & ID # XXXXX to where the activity of both LLCs is reported.

Stephen G :

You wanted steps .....................

Customer:

Great! Yes please. I go to the IRS site first correct? Then I create the new Tax Payer ID and "make up" a name for this Partnership entity?

Stephen G :

First, the name..........technically it doesn't matter, but in my opinion, it should be a combination of the name of the 2 LLCs if that is possible. Although the actual partners will be the same as the LLC owners.

Stephen G :

Then once you decide on that, you go to IRS.com and I believe that you can get your own ID number that way for the partnership. You should fill out the application (that you've probably done for the LLCs in the past & is also available online), and have that ready. If there's a problem with the IRS.gov approach (they are really busy right), you can do it by phone.

Customer:

Okay, give me just a second here

Stephen G :

By the way, since the partners don't actually file the K-1s with their returns, once you get this figured out & TT produces the K-1s, you can give them to your partners even if you don't get the 1065 all put together to file by 4/15; you could still get an extension for that if necessary without jamming up your partners.

Stephen G :

There's no state returns, so no problem there.

Stephen G :

By the way, where are you geographically in Washington?

Customer:

Okay, that is a very good suggestion. Yep, no State Returns either because we are in Washington state.

Stephen G :

Even if you didn't have an ID # XXXXX now that's no big deal - you just use "Applied For", but I only toss that in, so you don't get hung up waiting for one............

Customer:

Once I have the new ID number and name and start working on the return my plan is to simply enter the combined results and ignore the transaction that moves assets from one LLC to the other and leave out the intercompany rent income/expense transaction between the two because they cancel each other out. Correct?

Stephen G :

Correct

Customer:

Good point. I can just stick a place holder number and name on my return in TT for know and update it when I actually get one.

Stephen G :

Where are you located geographically?

Customer:

Business is in Pullman WA...a college town where the State University is located.

Stephen G :

What part of Washington - anywhere near Seattle? I'm asking only because I have a friend - a CPA out there- plus I might want a cold beer some day :]

Customer:

I'm assuming that TT has the tools for me to more properly evaluate this but I was thinking of using SL Depreciation (if its allowed) because I don't think I need the depreciation deductions really early.

Stephen G :

It isn't optional for the real estate; commercial is now 39.5 years I think, but I'd have to check that; don't forget you have to do an allocation between land & building;

Customer:

I live in Seattle but the bar is out in the eastern part of the state in small college town. Washington State University Cougars and their wild and crazy new head coach Mike Leach and his Air Raid offense

Stephen G :

OK, enough of that

Customer:

Alright, I'm going to dig into this application for a new Tax Payer ID/Partnership right now. Is it okay if I leave this chat open for a while longer while I look into that?

Stephen G :

There's another purchase price allocation form that is supposed to be filed by both the buyer & seller; did you do that as part of the purchase transaction? Was there a bill of sale. You realize that you can now amortize goodwill for tax purposes?

Customer:

OMG! I did not know you could amortize goodwill. Thats good news

Stephen G :

Sure, I was going to suggest that; just type something if you want me & I'll get an email from the site & I'll come back as fast as I can.

Customer:

I have a settlement statement from the purchase transaction that shows the allocation of Purchase price to assets (including Goodwill). The annoying part is that they broke out Furniture and Fixtures and Goodwill and Land & Buildings...The "Land & Buildings" number is XXXXX lump sum amount that includes both which makes it very hard for me to separate them into Land vs Building...I suppose that means I can do whatever I want?

Stephen G :

No it doesn't

Stephen G :

If you want to avoid trouble down the road..............you need to do the allocation based upon the real estate assessment

Stephen G :

Whatever % the land is & whatever % the building is to the total assessment; use that ration times the purchase price allocation to the Land & Buildings to do the split

Stephen G :

Also, you need to file Form 8594 with your return; you should review the instructions - I believe the latest version is 12/2012

Stephen G :

You may begin to understand why I'm suggesting an extension with 3 or 4 days left in the filing period

Stephen G :

That Form should have been completed and agreed to by the buyers & sellers at closing; but at least you have an allocation in the agreement; that's what you'll have to use.

Customer:

All I have to go by is the appraisal which was required by the lenders and is very detailed. The appraiser valued the Land & Building together at $415,000 which isn't helpful on its own...but deep in the appraisal reports is a tax assessed value which states a "Land" value of $5,412 and an "improvement" value of $222,900 for a total of $228,312 and 2011 Taxes of $3,009.

Stephen G :

That is the actual real estate tax assessment?

Customer:

My idea is to use that assessed land and building value to determine my allocation of the purchase price between land and building...I simply keep the Land vs Building amount in the same proportion and but increase the total from $228k up to the $415k value that they assigned in the Settlement.

Stephen G :

Wow, must be an undesirable and very small piece of land. Is it zone commercial or is the bar there grandfathered?

Stephen G :

Yeah, that's exactly the way I suggested you do it; it just seems odd that the land is so low.

Customer:

Yep that's what it says...its for Parcel# XXXXX Value = $5,412 and Improvement Value= 222,900 and total 2011 Taxes of $3,009.

Customer:

I agree, I'm bothered by the low land value as well. You have to understand that this place is an Oasis out in the middle of nowhere however so maybe that's not so far fetched.

Stephen G :

It must be typical of your area; I'm not used to seeing that; mostly ours is closer to 50/50, but that means nothing in your case.

Stephen G :

OK, I thought it was in a town close to the school

Customer:

Agreed, it actually seems very low to me despite the location.

Stephen G :

Well that's good for you;

Stephen G :

Is there anything in the appraisal contrary to that kind of allocation in terms of the land value in the appraisal?

Stephen G :

Of course with new owners & new purchase, it may be re-assessed.

Customer:

Its stated clearly in a number of reports supporting the transaction however, so I suppose that is justification. The only thing I was thinking is that the "Land" is the Land value and the Improvements number isn't the building but rather the sidewalks, parking lot, water/sewer infrastructure and such. If I looked at it this way and treated the whole $228k as "Land" then we are talking 50/50 as you suggested.

Stephen G :

Oh, so there are other improvements other than the building?

Stephen G :

If the 228 was land & building why would you treat it all as land? or wasn't that the case?

Customer:

Just the usual stuff...sidewalks, parking lot, municipal facility infrastructure

Customer:

It doesn't actually say Land and Building. It says "Land Value" and "Improvement Value" and I interpreted the building as being included in the Improvement Value and maybe I shouldn't be.

Stephen G :

What is the breakdown on the real property assessment between those 2 items.

Stephen G :

the building would be in the improvement figure unless it is identified separately

Customer:

It says " Taxes and Assessed Value....Parcel # XXXXX Land Value = $5,412, Impr. Value = $222,900, Total Value = $339,312, Total Taxes = $3,009.60....that is word for word.

Stephen G :

OK

Stephen G :

well I'd use the % as we discussed

Customer:

Then later in the Appraisal report after combining 3 different methods, the appraiser settles on a value of $415,000 total for both the Land and the Building. You pretty much know as much as I do now.

Stephen G :

as far as the improvements; either you break those down or just lump everything into the building & depreciate it as depreciable commercial property ie. building

Stephen G :

So does the appraiser break out the land anywhere in his workup?

Customer:

I'm inclined to do the latter, keep it simple, they are not huge numbers and it will be much easier administratively. I'm inclined to just us the full assessed value of $228,000 and call that the "Land" and assign the remainder of the $187,000 remainder of the $415k to the building and call it good. This makes it closer to 50/50 which was my expectation going into this thing as well.

Stephen G :

& the 415K for land & building is what is allocated in the purchase agreement, correct?

Customer:

Yes.

Stephen G :

Well, its your business & your allocation, but personally, I'd stick with the real estate assessment breakdown.

Stephen G :

I'm just curious as to what the appraiser did for the land when he worked up the number he went with for the appraisal. That's probably the most current & accurate breakdown if the figure is in his workup as to how he came up with his number.

Customer:

I'm looking at the a list of "Land Improvements" in the appraisal report and see that the building is not included in the list. This is further evidence that the "Land" valuation is $228K and the building is $187K and that's how the $415K should be split. This passes the "smell" test and I think it makes much more sense to do it this way.

Stephen G :

Or he just used market comparables to arrive at the value which may not break anything down

Customer:

True, I will do a little more homework on this and figure it out so we can move on.

Stephen G :

I agree, you can't compare the terminology

Stephen G :

ok, I'll be around

Customer:

I will now attempt to get that Tax Payer ID number and get a name in place. I will let you know if I have trouble there but am assuming it won't be bad. I may end up doing as you said and getting K-1s to the guys (so they don't want to kill me) and then my extend and file the partnership return later...if I do that I just want to make sure I do it right and don't get the guys into any trouble.

Stephen G :

I agree, but trust me, I've done it many times when it became necessary; however most of the partners I had were on extension anyway, didn't get all their k-1s until july or aug

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4066
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 3 other Tax Specialists are ready to help you
Expert:  Stephen G. replied 1 year ago.

Ok, thanks very much, you know where to find me if you need me. Steve G.

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